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Estate Planning and the Upcoming Elections

September 15, 2020

by the McNees Estate Planning Group

The upcoming federal elections are a reminder that estate plans should be reviewed frequently to make sure the plan carries out your wishes in a tax-efficient manner. You may want to revise your plan depending upon the potential outcome of the elections and your personal circumstances.

For the most part, the Republican Party is proposing to maintain the tax laws as enacted in the 2017 Tax Cuts and Jobs Act. In contrast, the Democratic Party is proposing (among other things):

Income Tax

  • Resetting the top marginal income tax rate to 39.6% and applying it to adjusted gross income over $400,000
  • Eliminating the 20% tax deduction for pass through business income
  • Taxing capital gains (and likely dividends) at ordinary income tax rates for taxpayers within income over $1,000,000
  • Impose the 12.4% social security tax on wages above $400,000 annually (currently, the tax only applies to the first $137,700 of wages)
  • Cut the standard deduction in half but eliminate the $10,000 limit on deducting state and local taxes

Estate and Gift Tax

  • Eliminate the cost basis step up upon death
  • Reduce the estate and gift tax exemption amounts to $3,500,000 per person from the current level of $11,580,000 per person
  • Increase the current top estate and gift tax rate of 40% to 55% or higher

Making decisions in the present based on tax policy changes that may occur in the future is a challenge. However, with respect to income tax planning, you may want to consider:

  • Accelerating income into 2020 by selling stocks with gains or ensuring that the sale of your business or investment real estate closes in 2020
  • Defer deductions into 2021 when the deduction may be more valuable (for example, a larger charitable contribution, payment of deductible expenses, or the purchase of depreciable assets)
  • Consider converting all or part of a traditional IRA to a Roth IRA

For your estate planning, we recommend you review your plan to ensure that it provides maximum flexibility considering any tax law changes that may occur. From approximately 2002 through 2009, “Disclaimer” planning was used to hedge against the scheduled rise and potential fall of the estate tax exemption amount from $1,000,000 per person to $3,500,000 per person (and 2010 with no estate tax) and then back to $1,000,000 per person in 2011 (all of which changed in 2010). Disclaimer planning – which involves a “fall back” to allow a surviving spouse to elect to fund a trust that serves to avoid estate tax – may once again become important.

Gifting of assets by the end of the year is appropriate for some clients who are concerned about the reduction in the estate tax exemption amount. A “Spousal Lifetime Access Trust” (a “SLAT”) may make sense for these clients. With a SLAT, one spouse funds a trust for the benefit of the surviving spouse for his or her lifetime. The spouse funding the trust can indirectly benefit from the SLAT when the beneficiary spouse receives distributions. The current gift uses some of the donating spouse’s gift tax exemption, but the gifted assets are not subject to federal estate tax or Pennsylvania inheritance tax when the beneficiary spouse dies. One negative side effect of funding a SLAT is the loss of the cost basis step up at death, but under the Biden tax plan, the cost basis step up would be eliminated anyway.

The elimination of the cost basis step up is one of the more significant changes proposed. As a reminder, under our tax system when you die owning property with a built-in gain, the gain is eliminated. For example, if you bought your house for $100,000 and it is worth $200,000 when you die, the $100,000 gain is eliminated.  It is unclear if the Biden plan simply eliminates the step up or will provide for a deemed sale of an appreciated asset at death (thus triggering a capital gains tax for all decedents). A capital gains tax at death in addition to the Pennsylvania inheritance tax and, if applicable, the federal estate tax certainly would be a tough pill to swallow. Clients who have assets with built in gains may consider gifting those assets and using life insurance as a planning option (since life insurance is not taxable income or subject to inheritance tax).

Finally, any planning strategy that is interest-rate sensitive is attractive right now. For example, the amount of interest charged is important with respect to the sale of a family business asset using seller financing or a family loan. Other planning techniques, such as Grantor Retained Annuity Trusts and Charitable Annuity Trusts, are also interest rate sensitive (the lower the rate the better). Currently, the minimum interest rates allowed by the IRS are historically low.

We encourage our clients to contact one of our several estate planning attorneys to review their estate plans. As always, our estate planning professionals are ready to assist our clients.

© 2020 McNees Wallace & Nurick LLC
McNees Insights is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.


Vance E. Antonacci

Kendra D. McGuire

Elizabeth P. Mullaugh

Andrew S. Rusniak

Rosa Conigliaro

Linda M. Eshelman

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